MODVAT Credit Allowed on DG Set Parts Used for Captive Power: CESTAT Delhi Explains the Law

Background of the Dispute

The appeal before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi, arose from a challenge by the Revenue to an order dated 04.02.2020 passed by the Commissioner (Appeals). The Commissioner (Appeals) had reversed the adjudicating authority’s decision and allowed MODVAT credit claimed on parts and components of DG (diesel generator) sets.

The assessee was engaged in the manufacture of yarn made from synthetic and artificial staple fibres, classifiable under Chapter Heading 55.09 and 55.10 of the Central Excise Tariff Act (CETA). In the course of its manufacturing operations, the assessee availed MODVAT credit on capital goods in terms of Rule 57Q of the Central Excise Rules, 1944.

To ensure uninterrupted power for its manufacturing activity, the assessee arranged for supply and erection of DG sets through external vendors. The core dispute was whether MODVAT credit on parts and components of these DG sets, received in the assessee’s factory and used for generating electricity, could be validly claimed when the assessee itself was not the manufacturer of the DG sets.

Facts Leading to Litigation

Procurement and Use of DG Set Components

The assessee placed purchase orders dated 23.10.1997 and 01.08.1998 for DG sets on M/s WNSD FIN and also placed separate purchase orders dated 23.10.1997 and 01.08.1998 on M/s WIL, New Delhi.
Under these purchase orders, the DG sets were to be supplied in the form of various spare parts and components required for assembling complete DG units.
These components were imported or sourced and then brought to the assessee’s factory premises on payment of appropriate central excise duty.
Within the factory, M/s WNSD undertook erection and assembly of the DG sets using these components.
After erection and commissioning, the completed DG sets were handed over to the assessee on 04.06.1998 and 24.03.1999.
The assessee availed MODVAT credit of the duty paid on the DG set components used within its factory as capital goods under Rule 57Q.

Revenue’s Stand

On scrutiny, the Revenue concluded that:

The assessee had essentially ordered “ready-to-operate” DG sets from M/s WNSD and M/s WIL.
Imported parts of DG sets were supplied by M/s WNSD.
After receipt of these parts at site, M/s WIL procured other indigenous parts/equipment/accessories and undertook the actual erection and commissioning of the DG sets.
On this basis, the department treated M/s WIL as the “manufacturer” of the DG sets assembled at the site.

The Revenue further contended:

Manufacture of DG sets at the site was exempt from excise duty.
Since the final DG sets manufactured/assembled by M/s WIL were exempt, M/s WIL could not lawfully take MODVAT credit on parts and equipment used for those DG sets.
As M/s WIL carried out the erection and commissioning on its own account, it could not be considered merely as a job worker of the assessee.
Consequently, it was argued that the chain of credit could not validly pass through to the assessee, rendering the MODVAT credit taken on DG set parts inadmissible.

Show Cause Notice and Initial Adjudication

Based on the above reasoning, the department issued a Show Cause Notice dated 25.04.2003 proposing:

Disallowance and recovery of MODVAT credit allegedly wrongly availed;
Recovery under the proviso to Section 11A(1) of the Central Excise Act, 1944 read with Rule 57U of the Central Excise Rules, 1944;
Levy of interest and imposition of penalty.

The adjudicating authority accepted the Revenue’s position and, by order dated 30.11.2019, confirmed the proposals in the Show Cause Notice and upheld the demand with consequential interest and penalty.

Commissioner (Appeals) Decision

The assessee challenged the adjudicating authority’s decision before the Commissioner (Appeals).

MODVAT credit on DG set components: CESTAT Delhi upholds eligibility for captive power equipment